Don’t Blame Landlords, Blame the IRS

While millennials and boomers fight over who's to blame for unaffordable housing, the real culprit should be obvious to all.

Home prices in America are insane. We’ve officially hit the lowest rate of homeownership for 30-year-olds on record—a measly 33% (down from 47% as recently as 1984—since the start of the millennial generation). Boomers blame millennials, and millennials blame greedy, boomer landlords, but the real blame? That belongs squarely on the IRS.

The median home price today is $435,300 and to avoid the added costs of private mortgage insurance, a perverse penalty for homebuyers to protect the financial industry from itself, a first-time homebuyer would need to come up with $100,990 in cash (including closing costs) and would then be on the hook for approximately $2900 per month. To qualify, they’d have to earn at least $97,000 a year, which balloons to around $110,000 if you factor in typical student loan debt. This assumes no other debt of any kind—no car loan, no credit card debt, no medical debt. Considering that the typical income for this cohort is just shy of $60,000 a year, a homeownership rate of 33% doesn’t look lazy, it looks damned impressive. We can rule out blaming millennials.

The Value of a Home

Most people see their house as a home. A domicile, a dwelling, a place to settle down and build a life and a family. But that’s not what financial markets price. They price value. And only part of the value of a home is as shelter. A home, particularly in the form of a primary residence or rental property, is also a tax vehicle.

Under the current US tax code, the property taxes and mortgage interest of a primary residence are treated as a tax deduction. That means this portion of the cost is effectively a “pre-tax” expense, similar to the treatment of a pre-tax 401k or a Health Savings Account, reducing your final tax bill. These tax savings are real, and they’re valuable. And the price of a house reflects its total value to the market, including those tax advantages.

So one might ask the reasonable question: when I buy a house, how much am I paying for the home and how much am I paying for the tax deduction? This is a perfectly calculable number allowing, of course, for the uncertainty of future real returns and the tax code. The short answer? The median home includes $108,200¹ in the price as a product of forward-paying the future tax benefits.

Instead of $435,300, the price drops to a comparably modest $327,100 and the required income decreases from $97,000 to $73,600 for an otherwise debt-free borrower if you remove this tax-driven price premium. Once you account for the actual cash flow costs and delayed benefits of homeownership, you save more without the deduction, than with.

This tax-driven price is simply the result of comparing the standard deduction (which doesn’t include homeownership) with the deductions available to the typical homebuyer, factoring in inflation rates, the “risk-free” rate (of the safest alternative use for the cash), and the tax savings over time. This is the real cost of the “tax deduction,” and it’s borne by every homebuyer, and especially by those priced out of homeownership.

The Missing Millions

There are 15.7 million additional American households that would qualify to buy a home, put down roots, paint the walls, build a garden, and experience the pride, stability, and security of homeownership, if it wasn’t for the present tax regime. Those missing 30-year-old homeowners? Here they are.

Of course, the obvious counter-argument is, where were they before? We’ve “always” had these deductions (true, if you consider “always” to start in 1986, since prior to that all interest from any source was deductible), why were 30-year-olds buying homes in higher rates before? The answer is multi-causal and complex, but it becomes at least marginally clearer when viewed from another perspective. So far, we’ve talked about prices in nominal terms (the actual number of dollars). We could instead talk about it in relative terms, by using a different measure of price. Of course, we can price any asset in terms of any other asset. From this standpoint the median home costs approximately 128 ounces of gold, 44 metric tons of copper, or 670,000 liters of orange juice at wholesale prices. But what’s probably most useful is to compare it to the labor required to pay for it.

In 1960, the median home cost 2.4 median salaries. Today it’s 7.0. Why? Unfortunately, we can’t simply pivot from greedy landlords to greedy employers. The real cause of all pricing phenomena is a simple dynamic that you already know: supply and demand. As highlighted in The Dual-Income Trap, the labor force participation rate (supply) has nearly doubled over this time period, while the self-employment rate (less supply) and business formation rate (demand) have both fallen. More people seeking jobs, and fewer creating them. More households with two incomes (and more income to qualify on and deduct against) competing against single buyers. The predictable result: higher home prices. Not just in nominal terms, but in labor terms. It now costs 1.7 annual worker incomes just to cover the tax benefits baked into house prices. Remove that, and adjust for the labor market dynamics, and home prices increased by only half an income total over the last 65 years. An increase? Sure. But NIMBYism, while real and preventable, is hardly the source of the catastrophe.

The Road to Hell

As with most government interventions, homeowner tax breaks began with good intentions. What started as an incentive to homeownership, premised on a national policy of supporting stable families and “skin in the game” of the national economy, has inevitably devolved into the actual mechanic pricing people out of homeownership.

This isn't an accident—it's a manufactured crisis, the predictable result of policy choices our leaders refuse to acknowledge. That’s not hyperbole. If anything, the problem is worse than it appears, which becomes apparent when you realize what happens next.

The lucky few who clear this initial tax hurdle get that premium back as savings—which they can then use to buy a second property, then a third. In doing so, they unlock an entirely new category of tax advantages: depreciation write-offs, 1031 exchanges, and "real estate professional" qualification that can defer or eliminate taxes for decades. In extreme cases, these taxes aren’t paid at all—they’re rolled into a final estate disposition and “stepped up” to current prices, neatly avoiding tax responsibility altogether. All of these future benefits get capitalized into current market prices, creating an even steeper climb for first-time buyers.

Are we supposed to blame landlords for filling out their taxes correctly?

Market Medicine

The knee-jerk reaction to eliminate these deductions looks emotionally satisfying, but is simply impractical. Many families rely on those tax breaks to cover the cost of their (already priced in) mortgage. Worse, an immediate elimination would create devastating wealth destruction for the average American whose net worth is largely based on home equity. Current homeowners would face mortgage payments calibrated to inflated prices while losing the tax benefits that justified those prices. The resulting foreclosure wave would make 2008 look quaint. Fortunately, better approaches exist.

The alternative to radical surgery isn't resigned acceptance of the status quo. What we need is strategic unwinding—a managed transition that gradually removes the tax subsidy without destroying existing homeowners or crashing the broader economy.

The mechanics are straightforward. First, step up the standard deduction incrementally over a ten-year period, slowly reducing the relative advantage of itemizing. Simultaneously, phase down the mortgage interest and property tax deductions, first with sensible limits—perhaps $25,000 annually for mortgage interest and $12,000 for property taxes—and then by gradually lowering those caps annually. This gives markets time to digest the changes, current homeowners time to refinance or adjust, and prospective buyers time to build savings as prices moderate.

For those with legitimate itemized deductions—charitable contributions, substantial medical expenses, job-related costs—offer a slightly reduced standard deduction for itemizers. This preserves the tax code's flexibility without creating artificial housing incentives.

The Fork Ahead

Critics will inevitably warn that any reduction in housing subsidies will crash home values. They're half right—values will moderate, which is precisely the point; too many people can't afford homeownership. But the 15.7 million households currently priced out of homeownership represent substantial pent-up demand. As those new buyers finally join the market, they'll offset much of the downward pressure from reduced tax incentives.

Ultimately, the question comes down to what outcome we want. We can choose to watch as the status quo consumes the financial stability, financial futures, and ultimately reproduction rate of our children, friends, neighbors, and colleagues, or we could demand action for a sane tax code which doesn’t systematically force young families to pre-pay decades in anticipated tax deductions in order to settle down at home.

The choice is binary: we can preserve the illusion that subsidizing homeowners helps homeownership, or we can actually make homeownership affordable. We can't do both.

1. Calculations assume a single buyer, $125,000 annual income, 2025 tax code, 3% inflation rate (higher than CPI, but lower than historical housing inflation), a 4.3% nominal risk-free rate (current 10-year Treasury yield), and a 6.6% mortgage rate over 30 years. Capitalized prices reflect the marginal buyer’s after-tax returns, as with municipal bonds priced for high-bracket investors.